Hyperbolic Discounting
We’ll accept smaller payoffs now over larger payoffs later on
If you were offered $50 now or $100 in a year, you’d likely take the $50 now. But what about $50 in five years or $100 in six years? We’ve only added a delay, but now it feels just as natural to wait for the $100.
Hardman (2009). Judgment and decision making: psychological perspectives. Wiley-Blackwell.
Given two similar rewards, we humans have a preference for one that arrives sooner rather than later. More interestingly, we tend to discount the value of the later reward by an amount that increases with the length of the delay.
Playing around with the notion of time a bit, a study (Madden, Ewan & Lagorio, 2007) showed that gamblers have even been found to perceive more value in rewards obtained following unpredictable delays than those obtained following predictable delays. This is very much in line with the thinking that we respond favourably to rewards at random intervals than those at pre-defined, and therefore expected intervals.
Takeaways for decision-makers
- Consider the value of immediacy / convenience into a product / service offering, over offering a marginally cheaper alternative at a significantly later point in time.
- Offer a premium service that prioritises delivery of that good or service over the expected norm. If it’s immediate enough, there will be demand for it.
- Be aware of the fact that there’s a exponential decay factor in our willingness to choose something now. As the main example above around £50 versus £100 shows, as time passes, our desire for relative immediacy diminishes substantially over time.
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- Aspirational membership schemes and belonging The category size bias provides a credible explanation for why we human beings tend to associate with large groups that are viewed favourably by society. Being part of a large and “desirable” social group can make others believe that we also possess the many qualities of its members. For small businesses, it suggests that forming or being a part of a consortium or large and high quality networking group can dramatically elevate your brand image.
- Communicating category sizes to nudge effectively Highlighting the differences between the large and small categories is highly likely to enhance the effect of the Category Size Bias. For instance, for software companies, stating that there are 10 features in the premium version versus 4 in the free version will help nudge a decision towards the premium version
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- The findings from this braingem can nudge better healthcare choices, encourage consumption of a given product, and lead to more confident consumer decisions.
- We mistakenly believe that items in larger categories have a higher probability of being picked than ones in smaller categories, despite all items having an equal chance of being picked.
- We’ll spend or gamble more money on items put in larger categories.
- We’re more likely to take action from tasks when they’re in a bigger list, over a smaller list.
- We once we put something into a group, we perceive it to adopt all the characteristics of that group. This suggests that small companies should foster alliances with similarly-principled, more established companies.
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